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First Central Savings Bank v. Meridian Residential Capital D/B/A/ Trump Financial

March 30, 2011

FIRST CENTRAL SAVINGS BANK,
PLAINTIFF,
v.
MERIDIAN RESIDENTIAL CAPITAL D/B/A/ TRUMP FINANCIAL, DAVID BRECHER, MERIDIAN MORTGAGE SERVICES, INC., DBS SERVICING SOLUTIONS, INC., NH APPRAISAL ASSOCIATES, INC., DAVID S. FRANKEL, P.C., MDS APPRAISAL GROUP, LAW OFFICES OF SAM SHORE, JEFFREY E. MEHL, ESQ., TRUE VALUATIONS APPRAISERS, ADMOR APPRAISALS, ATRIUM APPRAISAL SERVICES, INC., THE ADDISON GROUP, OLD REPUBLIC NATIONAL TITLE INSURANCE CO., ANDREW KESLER, AND MAK APPRAISALS,
DEFENDANTS.



The opinion of the court was delivered by: Dora L. Irizarry, United States District Judge:

MEMORANDUM AND ORDER

On August 7, 2009, plaintiff First Central Savings Bank ("First Central") filed this civil RICO action against defendants Meridian Residential Capital, LLC s/h/a "Meridian Residential Capital d/b/a Trump Financial" ("Meridian"), David Brecher, Meridian Services, Inc. s/h/a "Meridian Mortgage Services, Inc." ("MSI"), DBS Servicing Solutions, Inc. ("DBS") (collectively, Meridian, Brecher, MSI and DBS are the "Meridian Defendants"), and various other defendants. The Meridian Defendants are seeking a court order imposing sanctions on Plaintiff pursuant to Rule 11 of the Federal Rules of Civil Procedure. For the reasons set forth below, the motion is granted in part and denied in part.

BACKGROUND

Plaintiff filed a complaint on August 7, 2009, alleging that it entered into a Loan Origination and Marketing Agreement with the Meridian Defendants that sets forth procedures for the parties to follow when originating and closing certain loans. Plaintiff further alleged that, between 2003 and 2008, the Meridian Defendants originated over 225 mortgage loans that are now on First Central‟s books, and that some are in foreclosure.

The complaint alleged that the Meridian Defendants submitted fraudulent information to First Central for the purpose of inducing Plaintiff to fund the loans. First, Plaintiff alleged that the Meridian Defendants and others submitted overstated appraisals which induced Plaintiff to issue or purchase loans that it otherwise would not have issued or purchased. (Compl. ¶¶ 52-55.) Second, Plaintiff alleged that the Meridian Defendants submitted loan applications that misrepresented borrowers‟ incomes, and that the Meridian Defendants and others permitted mortgages to close with funding by Plaintiff despite the fact that the defendants had knowledge of facts that adversely affected Plaintiff‟s interests with respect to the loans. (Compl. ¶¶ 47-51, 58-62.) Third, Plaintiff alleged that the Meridian Defendants and others closed the mortgage loans without including the interest rate floors that Plaintiff had demanded. (Compl. ¶¶ 56-57.)

Plaintiff asserted various claims, including a RICO claim pursuant to 18 U.S.C. § 1962(c), a RICO conspiracy claim pursuant to 18 U.S.C. § 1962(d), and various state law claims. Several defendants filed motions to dismiss the complaint. The court granted the motions to dismiss, but the dismissal has been held in abeyance pending the filing of an amended complaint.

The Meridian Defendants also moved for sanctions pursuant to Rule 11 of the Federal Rules of Civil Procedure, arguing that plaintiff made factual assertions in its pleadings without evidentiary support. Because the motion was filed prior to the Order granting the motion to dismiss, Defendants sought to have the complaint dismissed and to have the Plaintiff charged with the attorneys‟ fees expended in making this motion.

APPLICABLE LAW

Under Rule 11, attorneys filing complaints are representing that, after reasonable inquiry, they believe that "the allegations and other factual contentions have evidentiary support or, if specifically so identified, are likely to have evidentiary support after a reasonable opportunity for further investigation or discovery." Fed. R. Civ. P. 11(b)(3). A pleading violates Rule 11(b)(3) where "after reasonable inquiry, a competent attorney could not form a reasonable belief that the pleading is well grounded in fact." Kropelnicki v.Siegel, 290 F.3d 118, 131 (2d Cir. 2002) (citation omitted); see also In re Pennie & Edmonds LLP 323 F.3d 86, 90 (2d Cir. 2003). An erroneous statement of fact within a pleading "can give rise to the imposition of sanctions only when the "particular allegation is utterly lacking in support.‟" Kiobel v. Millson, 592 F.3d 78, 81 (2d Cir. 2010) (quoting Storey v. Cello Holdings, L.L.C., 347 F.3d 370, 388 (2d Cir. 2003). "Rule 11 neither penalizes overstatement nor authorizes an overly literal reading of each factual statement." Id. at 83 (citation omitted). Moreover, "a plaintiff is not required to know at the time of pleading all facts necessary to establish the claim," and thus may make allegations based on information and belief. Commercial Cleaning Servs., LLC v. Colin Serv. Sys., Inc., 271 F.3d 374, 386 (2d Cir. 2001).

"Additionally, "when divining the point at which an argument turns from merely losing to losing and sanctionable, . . . courts [must] resolve all doubts in favor of the signer‟ of the pleading." Young v. Suffolk County, 705 F. Supp. 2d 183, 214 (E.D.N.Y. Apr. 9, 2010) (quoting Rodick v. City of Schenectady, 1 F.3d 1341, 1350 (2d Cir. 1993)). Nevertheless, "the creativity of an attorney may not transcend the facts of a given case." Levine v. Fed. Deposit Ins. Corp., 2 F.3d 476, 479 (2d Cir.1993) (citation omitted).

Rule 11 also requires that the party seeking the imposition of sanctions permit the alleged violator twenty-one days to correct its conduct. Lawrence v. Richman Group of CT LLC, 620 F.3d 153, 156 (2d Cir. 2010). The twenty-one day period between notice and filing is referred to as a "safe harbor" because the opposing party may avoid sanctions by withdrawing or correcting the offending material during this period. As set forth below, Plaintiff did take some steps toward addressing the Meridian Defendants‟ complaints within the safe harbor period.

DISCUSSION

1.FACTUAL ALLEGATIONS CHALLENGED BY THE MERIDIAN DEFENDANTS

Defendant identifies four groups of allegations that it believes were stated without foundation: (1) that the Meridian Defendants concealed borrower defaults by making payments on behalf of defaulted borrowers; (2) that the Meridian Defendants overstated the income of borrowers; (3) that the Meridian Defendants permitted loans to close despite knowledge of judgments and liens; and (4) the Meridian Defendants closed loans without interest rate floors. The ...


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